By: HUB’s EB Compliance Team

The Treasury Department and IRS recently released proposed rules applying the ACA employer mandate and certain nondiscrimination rules to individual coverage health reimbursement arrangements (or “ICHRAs”). While these new proposed rules answer some questions, they also serve to highlight ICHRA complexities that could diminish the appeal of these arrangements for many employers.

Background

As we highlighted in an earlier article, last June the Treasury and the IRS started allowing employers to reimburse employees for individual coverage. This was a reversal of the IRS’s position from 2013. However, this reversal left key open questions concerning how ICHRAs might satisfy ACA’s employer mandate. Another equally compelling concern how the ICHRA rules allowing increased reimbursement based on age squares with existing nondiscrimination rules that apply to self-funded plans.

ACA Employer Mandate

Generally, the ACA employer mandate requires employers of a certain size to offer affordable, minimum value coverage to their full-time employees or pay a penalty (more detail is available in our prior articles here). For ICHRAs, this presents two questions.

  1. How is an ICHRA “affordable”?
  2. How does the ICHRA provide “minimum value” (“MV”)?

Affordability and MV

Generally, for an ICHRA to be considered “affordable” the difference between the monthly amount available under the ICHRA and the cost for available coverage for the employee must be less than 9.78% (for 2019) of the employee’s household income. (For ICHRA’s crediting dollar amounts on an annualized basis, the “monthly amount” is the annual amount divided by 12.) Also note, for “affordability” purposes, the “cost of available coverage” is the lowest cost silver-level individual plan available to the employee.)

Applied strictly, the employer would have to know every employee’s household income and the cost of coverage for every single employee, which can vary widely depending on where the employee lives. Fortunately, the IRS offered important simplifying assumptions in the proposed rules.

  1. Worksite location: First, the “cost of available coverage” can be determined based on the employee’s worksite, rather than the residence of the employee. For teleworking employees, employers can use the worksite the employee would report to, if they were required to report. If an employee’s worksite changes, the employer needs to change the plan it uses to determine the “cost of available coverage” by the first day of the second month after the change. The IRS specifically refused to allow multi-site employers to use the same rate across multiple locations.
  2. Age Variation: Second, because age variations impact the “cost of available coverage” in the individual market, the proposed regulations let employers use the lowest cost available coverage for the lowest age band. This is significant since the lowest age band will likely be the least expensive in most cases.
  3. Calendar versus Non-calendar Plan Year Pricing Rule: Third, rates for individual coverage are not usually known until November, when the open enrollment for the ACA exchanges begins. Recognizing this, the proposed rules allow employers with calendar-year ICHRAs to use the individual rates from January of the prior calendar year (e.g., an ICHRA for the 2020 calendar year would use the rates from January 2019). However, non-calendar year ICHRAs must use the rates from the current calendar year (e.g., an ICHRA with a February 1, 2020 plan year start date would use the rates from January 2020). Treasury and the IRS are working with other state and federal government agencies to produce a comprehensive list of rates that employers can use for this purpose.
  4. ACA “household income” Safe Harbor Rules: Finally, the safe harbors that serve as proxies for employee household incomes (e.g., rate of pay, Form W-2, or the Federal Poverty Line) apply as well. This means to be affordable the cost of available coverage must be 9.78% of the employee’s rate of pay, Form W-2 compensation, or the Federal Poverty Line (depending on which safe harbor the employer is using). These safe harbors apply to the amount the employee would pay, after taking into account any of the above three simplifying assumptions the employer chooses to use. In other words, affordability can be based on the “cost of available coverage” after these simplifying assumptions.

Each of the above rules can be applied by class of employees (we describe the authorized classes of employees in our prior article here). Put another way, the employer could choose to use some or all these rules for one class of employees receiving an ICHRA and not another. However, each of the above simplifying rules has to be applied consistently within a class of employees.

In addition, IRS ICHRA guidance requires an employee to have a minimum essential coverage (MEC) individual policy to be eligible for the ICHRA. As a general matter, individual MEC policies purchased through the federal or state marketplace will almost always meet the ACA “minimum value” requirement. Therefore, the Treasury and IRS stated that an ICHRA that is affordable will automatically be treated as providing MV.

Nondiscrimination

Fortunately, the nondiscrimination relief is comparatively simpler. Current nondiscrimination rules do not let traditional health reimbursement arrangements (HRAs) vary the maximum reimbursement based on age. However, the new ICHRA rules will allow the maximum reimbursement to increase as the age of the employee increases (but by no more than a multiple of three) as long as employees who are the same age (as of the beginning of the ICHRA plan year) receive the same amount.

Rather than try to create a special safe harbor, Treasury and the IRS said that if an ICHRA is structured properly (as described above), the variation based on age will not generate a nondiscrimination problem.

Importantly, other aspects of the nondiscrimination rules (such as the participation requirements and making sure the ICHRA does not favor highly compensated individuals in operation) remain applicable and could still pose design challenges for some plan sponsors. We particularly note that for employers that already sponsor a self-funded medical plan and must already satisfy IRC Section 105(h) testing obligations, adding a new ICHRA that removes significant numbers of less well-paid employees from the testing pool, could negatively impact the remaining traditional self-funded medical plan’s ability to pass applicable testing. We believe regular plan testing will become even more crucial as a newly-launched ICHRA program could mean that the traditional plan’s remaining participant group may suddenly disproportionality include highly compensated employees. A complete discussion of the nondiscrimination rules is beyond the scope of this article. However, while following the ICHRA rules for age variation will not, by itself, result in a nondiscrimination violation for the ICHRA, employers need to consider the other nondiscrimination effects of moving portions of their workforce onto an ICHRA.

Takeaways

Although the simplifying assumptions and nondiscrimination relief are helpful, they still create significant administrative work to determine the cost of coverage for each work location and keeping track of employee movements. An employer could neutralize much of that burden by setting the ICHRA dollar amount high enough so that the most expensive silver-level individual plan remains affordable. Of course, that could result in significant additional ICHRA funding costs. Additionally, the other unresolved issues and additional considerations discussed in our prior article still apply.

Normally, when HUB writes about proposed rules, the standard caveat is that you cannot rely on them yet. However, in this case, Treasury and the IRS said that employers can rely on these rules starting January 1, 2020. Moreover, employers are told that they can continue to rely on them until six months after the final rules are published. However, given the significant administrative work involved in setting up and maintaining an ICHRA, we anticipate that most employers won’t be comfortably positioned to offer an ICHRA starting in 2020.

If you have any questions, please contact your HUB Advisor. View more compliance articles in our Compliance Directory.

NOTICE OF DISCLAIMER

The information herein is intended to be educational only and is based on information that is generally available. HUB International makes no representation or warranty as to its accuracy and is not obligated to update the information should it change in the future. The information is not intended to be legal or tax advice. Consult your attorney and/or professional advisor as to your organization’s specific circumstances and legal, tax or other requirements.